Other Provisions of CARES Act
As discussed in our separate post discussing Recovery Rebates, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted on March 27, 2020. In addition to the Recovery Rebates discussed in that separate post, the law also contains numerous other tax provisions. Below is a summary of the other major provisions.
Qualified Improvement Property: A tax provision that has languished due to a drafting error in the Tax Cuts and Jobs Act of 2017 has been fixed. Qualified improvement property is eligible for bonus depreciation retroactively effective to January 1, 2018. In addition, also retroactively effective to January 1, 2018, the depreciable life of such property is 15 years. (If a taxpayer uses the §179 election to fully expense the cost of such improvements or uses 100% bonus depreciation, there will be no basis remaining to be depreciated. However, for taxpayers with any remaining basis after §179 and/or those who elect out of bonus depreciation, the remaining basis is depreciated over 15 years.)
Deferral of Employer Portion of the Social Security Tax: The employer share of the Social Security payroll taxes due from March 27, 2020 through December 31, 2020 is deferred, and employers can pay it in two future installments. The first half installment will be due on December 31, 2021 and the second half installment will be due on December 31, 2022. (This deferral also applies to the employer-portion of the Social Security tax that is part of the self-employment tax.) It is important to note that all other federal payroll taxes remain due on the normal due dates. Therefore, federal withholding, the employee portions of the Social Security and Medicare taxes and the employer portion of the Medicare tax are not deferred and remain due on the usual due dates.
Refundable Payroll Tax Credit: Certain employers can receive a refundable credit against employment taxes equal to 50% of qualified wages paid to employees on or after March 13, 2020 and on or before December 31, 2020. The credit is available for the first $10,000 of wages or health insurance benefits paid to each employee.
To be eligible during a given quarter, an employer’s business must be fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to the outbreak. In addition, employers are also eligible for a given calendar quarter if their gross receipts are less than 50% of the gross receipts for the same calendar quarter in the prior year. Such employers will remain eligible for the credit for subsequent quarters until whichever occurs first: The quarter following the first calendar quarter during which their gross receipts are more than 80% of the gross receipts for the same calendar quarter in the prior year, or until the end of 2020.
Early Retirement Account Withdrawals: The 10% penalty on early withdrawals from IRAs and other qualified retirement accounts is waived on withdrawals of up to $100,000 for distributions that occur during the 2020 calendar year, if they are made in the following circumstances: The individual is diagnosed with COVID-19 or has a spouse or dependent who is diagnosed with COVID-19, or the individual experiences adverse financial consequences due the outbreak, including being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of child care due to the outbreak, having a business that is owned or operated by the individual closed or reduce its hours due to the outbreak. The Secretary of the Treasury is permitted to announce other factors in the future.
The income from the withdrawals is subject to inclusion in income ratably over a three-year period, such that one-third of the withdrawal(s) is recognized during each of the three years of 2020, 2021 and 2022.
Taxpayers may recontribute the previously-distributed amounts to a qualified retirement plan within three years. The three-year period is measured from the day after the date on which the distribution was received. Such recontributions can be made to the employer-sponsored plan from which they were originally distributed and/or to a traditional IRA.
Amounts recontributed will not be treated as taxable distributions. Instead, the recontributions will be treated as if they were rollovers of the original distributions, and the rollovers will be treated as if they had occurred within 60 days from the date on which the original distribution was made.
Loans from Retirement Plans: During the 180-day period beginning on March 27, 2020, employer-provided retirement plans can offer loans of up to $100,000 instead of being limited to the normal $50,000 cap, and the due date for any loan payment on a balance outstanding as of March 27, 2020 and on any loan made between that date and December 31, 2020 is delayed for one year.
No Required Minimum Distributions for 2020: Required minimum distributions from retirement accounts for those who are 72 or older (used to be 70½ or older) are waived for the 2020 tax year for all taxpayers, even if they have not been directly affected by COVID-19.
Limit on Business Losses: The limit on business losses recognized on Form 1040 and computed on Form 461, Limitation on Business Losses, is retroactively eliminated for the 2018 and 2019 tax years, and it is also eliminated for the 2020 tax year.
Net Operating Losses: Net operating losses arising in the 2018, 2019 or 2020 tax years can be carried back for five years and the 80% net operating loss deduction limit is eliminated for net operating losses arising in those three years.
Business Interest Expense Limit: The limit on the deduction for business interest expense that is computed on Form 8990, Limitation on Business Interest Under Section 163(l), is increased from 30% to 50% for the 2019 and 2020 tax years. In addition, when computing the limit for the 2020 tax year, taxpayers will be permitted to elect to use their adjusted taxable income from 2019. This election will be advantageous if 2019 income is higher than 2020 income, since using higher income to compute the interest limit results in a larger allowable interest deduction.
Small Above-the-Line Charitable Contribution: For the 2020 tax year, charitable contributions of up to the first $300 can be deducted above the line to determine adjusted gross income. As a result, this deduction will be available for both those who itemize and those who do not itemize deductions for the 2020 tax year.
Itemized Deduction Charity Limit: The adjusted-gross-income limit for the itemized deduction for cash charitable contributions is typically 50% of adjusted gross income. This limit is eliminated for the 2020 tax year.
HSA and Telehealth: High-deductible health insurance plans with health savings accounts (“HSAs”) can permit telehealth services to be covered, even if such services have no deductible.
Medical Expenses for Certain Over-the-Counter Products: Health savings accounts (“HSAs”) and flexible spending accounts (“FSAs”) can be made for over-the-counter menstrual products.
The new law also makes many non-tax changes, including the expansion of unemployment benefits, suspension of certain student loan payments and creation of loans for business with fewer than 500 employees administered by the Small Business Administration.
Information about the SBA loans is available at: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
The paycheck protection loan program provides that the loan will be forgiven for employers who retain their employees for at least eight weeks after the loan occurs, if the employers provide the required documentation that payroll payments were made to the employees or for certain other expenses. In addition, loans forgiven under this program will not be treated as income from the cancellation of debt for federal income tax purposes.
However, employers that claim the 50% payroll credit, discussed earlier, are not eligible for the paycheck protection loan program, and employers who receive forgiveness of loans under the paycheck protection loan program are not eligible for the deferral of the employer-share of the Social Security payroll tax, also discussed earlier.